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Tuesday, July 12, 2011

According to Standard & Poor no other force is likely to shape the future of national economic health, public finances, and policymaking as the irreversible rate at which the world's population is aging.

U.N. figures show the proportion of the world's population aged over 65 is set to more than double by 2050, to 16.2% from 7.6% currently. By the middle of the century, about 1 billion over 65s will join the ranks of those classed as of non-working age.

The cost of caring for these people will profoundly affect growth prospects and dominate public finance policy debates worldwide. The following is an extract from the report and it's findings.

Under our base-case scenario, the government refrains from adjusting either its fiscal stance as described above or any policies governing age-related spending categories. In other words, the government takes no additional steps after 2012, which is our cut-off year, except borrowing for any budget shortfall that may materialize.

We selected 2012 as we believe that the size of current budget deficits in many countries will gradually improve and 2010 could in many cases imply a deficit bottom, which would overstate the magnitude of the long-term challenge. As age-related outlays creep upward, followed by the additional interest costs of rising national debt, total government expenditure gradually increases. Currently, the median of the sample for general government spending to GDP exceeds 44%. Following the fiscal consolidation we expect, spending to GDP will remain fairly stable at just above 40% of GDP until the early-2020s, as age-related spending increases are relatively small and generally expected to be offset by marginally lower interest rate outlays.

This delicate balance will, by our projections, break down in the early 2020s, however, as age-related spending starts to accelerate, leading to higher deficits and interest payments. By the late 2030s, government spending is anticipated to account for 50% of GDP, climbing to 60% in 2050.